CFTC Issues Guidance to Exchanges and Clearinghouses on Virtual Currency Derivative Product Listings

The CFTC issued staff guidance to exchanges and clearinghouses to “ensure proper surveillance and oversight of the trading and clearing of virtual currency contracts.”

The CFTC stated that virtual currencies “are unlike any commodity that the CFTC has dealt with in the past.” The CFTC cited heightened risks and a lack of transparency and susceptibility to market manipulation as causes for concern about how virtual currency derivative products may impact the commodities markets. As a result of these risks, the CFTC identified several areas that demand greater attention from designated contract markets (“DCMs”), swap execution facilities (“SEFs”) and derivatives clearing organizations (“DCOs”). As described in the advisory, the CFTC set the following expectations:

  • Enhanced Market Surveillance. The CFTC expects exchanges to enter into information-sharing agreements with spot markets for virtual currency products in order to facilitate access to trade data. The CFTC heightened its expectations for the monitoring of “relevant data feeds” from the underlying spot markets. The CFTC expects that exchange-listed virtual currency contracts should be based on spot markets that adhere to federal anti-money laundering regulations.
  • Close Coordination with the CFTC Surveillance Group. The CFTC expects exchanges to regularly coordinate with CFTC staff regarding the surveillance of virtual currency derivative contracts, provide certain trade data to CFTC staff upon request, and coordinate with staff regarding the timing of new virtual currency derivative listings.
  • Large Trader Reporting. The CFTC recommends that exchanges implement a large trader reporting threshold for virtual currency derivative contracts at “five bitcoin” or the “equivalent for other virtual currencies.” This threshold could help to better identify traders who are engaging in virtual currency-related market manipulation.
  • Outreach to Members and Market Participants. The CFTC expects exchanges to “meaningfully” engage with stakeholders in the lead-up to new virtual currency derivative product listings. This includes the expectation that exchanges will solicit comments from stakeholders not only on contract terms and vulnerability to market manipulation, but also on the impact on clearing members and futures commission merchants. The CFTC also expects exchanges to share feedback from market participants with CFTC staff.
  • DCO Risk Management. The CFTC expects a DCO to submit to CFTC staff proposed initial margin requirements and other relevant information concerning a proposed virtual currency derivative contracts. CFTC staff also expects DCOs to explain their consideration of stakeholders’ views in approving proposed contracts.

The CFTC explained that in the event that a self-certified virtual currency derivative contract raises concerns, the CFTC will provide a notice to the exchanges regarding its concerns as to compliance with the CEA and CFTC rules.

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